October 30 2015

US Securities and Exchange Commission 100 F Street NE Washington DC 20549

Re Project level payment disclosure requirements by extractive industry companies as part of Section 1504 of the Dodd Frank Act

Dear Chair White and Commissioners

The Columbia Center on Sustainable Investment (CCSI) a joint center of Columbia Law School and the Earth Institute at Columbia University is an applied research center and forum dedicated to the study practice and discussion of sustainable international investment In this letter we express our professional opinion regarding the importance of project level payment disclosure by extractive industry companies for institutional investors The findings presented hereafter are the result of a thorough investigation based on a myriad of interviews with active and passive institutional investors as well as with academics in the economics business and legal fields

Background on Section 1504

The technical risks of global natural resource development have been well documented What is less understood but no less important are the growing political regulatory and reputational risks involved in meeting the worldrsquos increasing resource needs Whether it is the threat of production disruptions in the Niger River Delta nationalization or abrupt changes in tax policy risks in Venezuela or a tenuous license to operate in Guatemala country and project-specific non-technical risks are becoming more acute as companies push further into the frontiers of petroleum and mineral exploration

To better assess non-technical risks evaluate management strategies and support efforts to hold resource rich country governments accountable Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (ldquoDodd-Frank Actrdquo) requires the disclosure of tax and other payments to host governments by extractive industry companies listed with the US Securities and Exchange Commission (SEC) on a project level1 What must be disclosed includes the total amounts of the payments by category the currency used to make the payments the financial period in which the payments were made the business segment of the resource extraction issuer that made the payments the government that received the payments

1 We understand the global standard for project level disclosures is consistent with the guidance initially set out in the August 2012 SEC Final Rules Section IID3c (Page 85-86) which indicate that project level disclosure is based on the contractual arrangements that define the relationship and payments made between companies and governments and is reinforced in complementary laws such as the EU Accounting and Transparency Directives (httpeur-lexeuropaeulegal-contentENTXTuri=celex32013L0034 httpwwweuroparleuropaeusidesgetDocdotype=TAamplanguage=ENampreference=P7-TA-2013-262) which define project as ldquothe operational activities that are governed by a single contract license lease concession or similar legal agreements and form the basis for payment liabilities with a governmentrdquo

1

and the country in which the government is located and the project of the resource extraction issuer to which the payments relate

When the Dodd-Frank Act passed in 2010 its Section 1504 was a groundbreaking provision and served as a model for other countries to follow However while the law remains in place the August 2012 rule implementing Section 1504 was successfully challenged by the American Petroleum Institute (API) and the US Chamber of Commerce in 2013 accordingly the courts have remanded the rulemaking back to the SEC On October 2 2015 the Commission released a rulemaking calendar that indicates it will draft a new proposed rule by the end of 2015 and meet to adopt a final rule in June 2016 Thus while a frontrunner in setting a new transparency standard in 2010 today the United States is lagging behind in regulating and improving good governance of the extractives industry Investors will face incomplete and inconsistent payment reports until the SEC aligns its rules to the emerging global standard for payment transparency that it had originally conceived2 Further given that other countries and companies are moving ahead with project level reporting public mistrust may increase for US listed companies that are not following similarly detailed reporting standards This may increase political and social risks for investors that have shares in US-listed companies

Investor Involvement

For the past five years investors with more than $6 trillion of dollars in assets under management have written repeatedly to the SEC Chair and Commissioners in support of strong rules for the implementation of Section 1504 Among other benefits and considerations they referenced ldquoinvestorsrsquo substantial interest in oil gas and mining industry payment transparencyrdquo3 They also underscored that the SECrsquos August 2012 implementing rule ldquohellipwould protect investors and promote efficient capital markets by providing investors with valuable factual information on risk profiles and company performancerdquo4

Presiding SEC commissioners and a former chair echoed these beliefs when the SEC issued its final implementation rules for Section 1504 in August 2012 For example Commissioner Luis Aguilar stated plainly ldquo[t]he final rule we consider today is in the interest of investorsrdquo5 Then Chairman Elisse Walter took this observation a step further by both pointing out how investors may use the information disclosed through the law and also by noting that the stability fostered by disclosures such as these contributes to more predictable investment conditions6

Finally many members of Congress including Section 1504 authors Senator Benjamin Cardin and Senator Richard Lugar have spoken on the Senate floor or submitted comments to the SEC stating that the legislative intent of the law is to provide necessary information to investors and

2 For more information on trends in payment transparency please refer to the appendix 3 Letter to Mary Jo White Chairman US Securities and Exchange Commission Group of institutional investors August 14 2013 httpswwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-3pdf4 Letter to Mary Jo White Chairman US Securities and Exchange Commission Group of institutional investors April 28 2014 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-36pdf 5 US Securities and Exchange Commission Aguilar Commissioner Luis A ldquoFacilitating Transparency of Resource Revenue Payments to Protect Investorsrdquo SEC Open Meeting Washington DC August 22 2012 httpwwwsecgovNewsPublicStmtDetailPublicStmt13705425807236 US Securities and Exchange Commission ldquoStatement at SEC Open Meetingrdquo Commissioner Elisse B Walter Washington DC August 22 2012 httpwwwsecgovNewsPublicStmtDetailPublicStmt1370542577444

2

its rulemaking mandate is consistent with the Commissionrsquos obligation to protect investors maintain fair orderly and efficient markets and facilitate capital formation7

Investor Benefits of Transparency

The following outlines six ways in which the presence and use of extractive industry payment information may improve investment environments and add material insight to investment analyses

1 Help assess the effectiveness of the diversification of risks within a portfolio

Project level payment reporting helps deploy sound risk-diversification strategies where a key component of projectsrsquo costs (ie taxes royalties or other payments) become known The diversification of portfolios is the basic technique for risk management used by investors a

7 Floor statement of Senator Lugar during Senate debate of the Restoring American Financial Stability Act May 17 2010 At 45135 httpwwwc-spanvideoorgvideoLibraryclipphpappid=598156901 Floor Statement of Senator Cardin ldquoThe Dodd-Frank Wall Street Reform and Consumer Protection Actrdquo July 15 2010 httpwwwcardinsenategovnewsroomstatements_and_speechesthe-dodd-frank-wall-street-reform-and-consumer-protection-act Letter to Mary Shapiro Chairman US Securities and Exchange Commission Benjamin Cardin US Senator Maryland December 1 2010 httpwwwsecgovcommentsdf-title-xvspecialized-disclosuresspecializeddisclosures-94pdf Letter to Elizabeth Murphy Secretary US Securities and Exchange Commission Carl Levin US Senator Michigan February 1 2011 httpwwwsecgovcommentss7-42-10s74210-19pdf Letter to Mary Shapiro Chairman US Securities and Exchange Commission Benjamin Cardin US Senator Maryland John Kerry US Senator Massachusetts Senator Patrick Leahy US Senator Vermont Charles Schumer US Senator New York and Barney Frank US Representative Massachusetts March 1 2011 httpwwwsecgovcommentss7-42-10s74210-42pdf Letter to Mary Shapiro Chairman US Securities and Exchange Commission Raul M Grijava Member of Congress Tucson Arizona November 15 2011 httpwwwsecgovcommentss7-42-10s74210-120pdf Letter to Mary Shapiro Chairman US Securities and Exchange Commission Benjamin Cardin US Senator Maryland John Kerry US Senator Massachusetts Senator Patrick Leahy US Senator Vermont Carl Levin US Senator Michigan and Charles Schumer US Senator New York January 31 2012 httpwwwsecgovcommentss7-42-10s74210-122pdf Letter to Mary Shapiro Chairman US Securities and Exchange Commission Rep Barney Frank Rep Joseacute E Serrano Rep Norman D Dicks Rep Henry A Waxman Rep Maxine Waters Rep Donald M Payne Rep Nita M Lowey Rep Betty McCollum Rep Barbara Lee Rep Jesse L Jackson Jr Rep Alcee L Hastings Rep Gregory W Meeks Rep Rosa L DeLauro Rep Marcy Kaptur US House of Representatives February 15 2012 httpwwwsecgovcommentss7-42-10s74210-162pdf Statement of Senator Cardin at Senate Foreign Relations Committee Hearing on National Security and Foreign Policy Priorities in the FY 2013 International Affairs Budget February 28 2012 httpwwwsecgovcommentss7-42-10s74210-262pdf Letter to Mary Shapiro Chairman US Securities and Exchange Commission Benjamin Cardin US Senator Maryland Richard Lugar US Senator Indiana Senator Patrick Leahy US Senator Vermont and Carl Levin US Senator Michigan October 31 2012 httpwwwsecgovcommentss7-42-1034-67717-comments-stay-motion34-67717-comments-stay-motion-2pdf Letter to Mary Jo White Chairman US Securities and Exchange Commission Senator Benjamin Cardin Maryland et al August 2 2013 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-2pdf Letter to Mary Jo White Chairman US Securities and Exchange Commission Senator Benjamin Cardin Maryland et al May 1 2014 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-41pdf Letter to Mary Jo White Chairman US Securities and Exchange Commission Rep Maxine Waters Member of Congress et al June 11 2014 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-50pdf

3

portfolio of different kinds of investments should yield higher returns and cause lower risks than any individual investment in the portfolio However as highlighted by Robert F Conrad in his August 17 2015 submission to the SEC8 this diversification of risks is only effective when the assets within a portfolio are statistically independent Project level information helps investors understand the level of interdependencies among assets in a portfolio An equity analyst asked to evaluate investment decisions either prospectively or retrospectively of a company with multiple extractive industry projects based on the overall cash flow is faced with significant challenges No understanding can be gained of either the contribution of any one project to the overall returns or the variation in benefits created by the contractual structure Project level data will help in this undertaking ldquoto either measure the overall ex post present value of the countryrsquos assets or the incremental effects on the variation of returnsrdquo9

2 Help adjust assumptions on a major cost to the project the taxes and other payments

This can be illustrated with a very simple example of a hypothetical mining company that operates two mines in a country wherein all details related to production cash costs depreciation and financial expenses are known individually for both mines but where only company-wide income tax data is available In this case estimating individual mine valuation would require extrapolation of taxes for individual mines by the equity investor

The following table shows the free cash flow estimates of the two Mines A amp B for the mining company wherein no project level tax data is available in the absence of Section 1504 An equity analyst would usually assume the effective corporate income tax rate of 20 percent for both mines

Details Unit Mine A Mine B Total Copper kt 200 100 300 Price $lb 300 300 300 Revenues US$M 1323 662 1985 Cash cost of sales US$M (794) (276) (1069)

Unit cash costs $lb 180 125 162 Cash Gross Profit US$M 529 386 915 SGampA + Other Operating Expenses US$M (66) (33) (99) EBITDA US$M 463 353 816 Depreciation US$M (80) (40) (120) EBIT US$M 383 313 696 Net financial expenses US$M (100) (50) (150) PBT US$M 283 263 546 Income Taxes US$M (57) (53) (109)

Income Tax 20 20 20 Net Income After Taxes US$M 226 210 437 Capex US$M (80) (40) (120)

Free Cash Flow US$M 226 210 437

All-In Sustaining Costs US$M 1097 451 1548 US$lb 249 205 234 8 Letter to Mary Jo White Chairman US Securities and Exchange Commission Prof Bob Conrad July 17 2015 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-81pdf9 Letter to Mary Jo White Chairman US Securities and Exchange Commission Prof Bob Conrad July 17 2015 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-81pdf

4

Assuming a 25 year mine life for mine A and a 10 year mine life for mine B constant copper production and prices and a real discount rate of 10 percent gives a net present value (NPV) of $2261 million for Mine A and $1421 million for Mine B

However assuming a blanket income tax rate for all the mines in one country is too simplistic as all projects are different in terms of fiscal regimes geography infrastructural improvement initiatives by the company among others which may entitle some projects for varied tax incentives relative to others In some countries such incentives are included in contracts which supersede the law and are mostly confidential Contracts also often stipulate stabilization clauses which freeze fiscal terms and therefore changes in the statutory terms do not affect those projects Some resource rich countries explicitly state in the law that fiscal terms can be negotiated on a project-by-project basis and therefore the statutory terms also do not apply In addition multinationals use their worldwide corporate structure to practice transfer pricing and lower their taxable income which in turn creates differences between the effective tax rate and the statutory level10

In the presence of project level disclosure requirements the same hypothetical mining company would disclose the true breakdown of the $109 million tax payment between the two mines An equity analyst would be able to use the effective income tax rate for the individual mines This would give a more granular estimate of the free cash flows and thus NPV Assuming that Mine A pays $20 million and Mine B $89 million the following table shows the free cash flow calculation estimates of the two mines

Details Unit Mine A Mine B Total Copper kt 200 100 300 Price $lb 300 300 300 Revenues US$M 1323 662 1985 Cash cost of sales US$M (794) (276) (1069)

Unit cash costs $lb 180 125 162 Cash Gross Profit US$M 529 386 915 SGampA + Other Operating Expenses US$M (66) (33) (99) EBITDA US$M 463 353 816 Depreciation US$M (80) (40) (120) EBIT US$M 383 313 696 Net financial expenses US$M (100) (50) (150) PBT US$M 283 263 546 Income Taxes US$M (20) (89) (109)

Income Tax 7 34 20 Net Income After Taxes US$M 263 174 437 Capex US$M (80) (40) (120)

Free Cash Flow US$M 263 174 437

All-In Sustaining Costs US$M 1060 488 1548 US$lb 240 221 234

10Given the contract specific fiscal regime the transfer pricing rules might be different eg allocations for head office expenses might vary by contract which in turn changes the effective tax rate

5

Using the additional income tax input data the above example provides an NPV estimate of $2626 million for Mine A and $1174 million for Mine B

The comparison of NPV estimates of the two mines as well as the overall company are summarized in the table below It is clear that with project level income tax reporting Mine A is now valued 16 percent higher and Mine B is valued at 17 percent lower The distribution of free cash flow between the two mines increases the overall valuation of the company by 3 percent

US $M W ithout W ith Variation Mine A 2261 2626 16 Mine B 1421 1174 -17 Total 3682 3800 3

3 Help assess the exposure to commodity price downturns

Another way investors may use the project level payment data is to analyze the industry cost curves to forecast commodity prices Using the above example the all-in sustaining costs (AISC = production costs + operating costs + financing expenses + taxes and related payments + capital expenditure) estimates for the two mines used in the previous example also change with the income tax disclosure The results are summarized in the table below

US $lb W ithout W ith Variation Mine A 249 240 -33 Mine B 205 221 81 Total 234 234 00

Without project level disclosure an investor would underestimate the AISC of mine B by 81 percent and conclude that the cost curve is steeper than it actually is With a more accurate picture of cash costs for individual mines investors have a way to identify which minesprojects would be more susceptible to declining commodity prices and thus can allocate the investment dollars more efficiently Commodity price declines play an important role in management decisions such as project write-downs and closures that can have a very significant impact on future cash flows and equity valuations11

Additionally with project level disclosure we can assess the elasticity of Mine A and Brsquos cash flows to prices For instance if Mine B has a more elastic tax regime with respect to prices than Mine A (and therefore a more elastic AISC overall)12 taxes for Mine B will fall by relatively more than for Mine A in case of a price downturn This means that in the case of Mine B the statersquos risk sharing is greater and that of the investor is smaller Project level disclosure will provide the information necessary to understand the relative risk sharing for various projects

11See for instance BHP Billiton writing down $28 billion off the value of its US onshore oil and gas business Anglo American writing down $4 billion of a Brazilian iron ore mine and a number of Australian coal assets (Tim Treadgold ldquoWidespread Mine Closures To Follow The Commodity Price Collapserdquo Forbes July 21 2015 httpwwwforbescomsitestimtreadgold20150721widespread-mine-closures-to-follow-the-commodity-price-collapse) Glencorersquos market capitalisation is down from $60bn as compared to four years ago (David Sheppard Neil Hume and James Wilson ldquoGlencore shares tumble on concerns over commodity pricesrdquo Financial Times September 28 2015 httpwwwftcomintlcmss02eea3106-65c2-11e5-9846-de406ccb37f2htmlaxzz3p5WJjI64)12 For instance Mine B has a sliding scale royalty according to prices whereas Mine A has a fixed royalty irrespective of prices In case of a significant price decline Mine B is likely to pay a lower royalty rate than Mine A if the sliding scale thresholds were set appropriately The same reasoning will apply to all price-indexed progressive fiscal regimes such as windfall taxes resource rent taxes price or profit based-sliding scale profit oil and cost oil etc

6

4 Lower the cost of capital

Studies have shown that companies that disclose earnings and tax payments outperform their peers that are less transparent For instance Barth et al (2013) provide evidence that firms with more transparent earnings enjoy a lower cost of capital They find ldquoa significant negative relation between our transparency measure and subsequent excess and portfolio mean returns and expected cost of capital even after controlling for previously documented determinants of cost of capitalrdquo13 In 2006 Leuz and Hail showed that the cost of capital for firms in countries with securities regulations ranking in the bottom quartile in terms of disclosure requirements was associated with a two percentage point increase as compared with the cost of capital for firms in countries whose securities regulation ranks in the top quartile14 The lower cost of capital is the result of equity holders and investors granting more trust to the companies they are investing in

This trust might be warranted In 2011 CCSI showed that 17 publicly listed extractive industry companies that disclosed tax payments on a country-by-country basis financially outperformed (in terms of price earning ratio return on equity return on invested capital) and reported fewer incidences of human and environmental rights violations in the communities they were operating than companies that did not15

5 Lower political risk

The perception of corruption good governance and transparency are fairly well established considerations in the assignment of sovereign debt ratings For example the SampP Sovereign Government Rating Methodology and Assumptions includes a political score which considers the ldquotransparency and accountability of institutions data and processes that also accounts for the perceived level of corruption of the country itselfrdquo16

Evidence suggests that EITI implementation and compliance have become leading indicators of substantive efforts to reduce political risk and enhance stability in the eyes of the main credit rating agencies For example in October 2013 the credit rating agency Moodyrsquos referenced the approval of Senegalrsquos EITI candidacy as a ldquocredit positiverdquo17 In its note on the development Moodyrsquos noted the following

[Senegalrsquos EITI candidacy] is credit positive because it reinforces Senegals commitment to improve transparency and governance strengthens the predictability of the operating environment in the extractive sector and promotes exploitation of the countrys resources all of which will support the countrys future growth prospects and the

13 Mary E Barth Yaniv Konchitchki and Wayne R Landsman Cost of capital and earnings transparency Journal of Accounting and Economics Volume 55 Issues 2ndash3 pages 206ndash224 AprilndashMay 2013 14 Christian Leuz and Luzi Hail International Differences in the Cost of Equity Capital Do Legal Institutions and Securities Regulation Matter Journal of Accounting Research Volume 44 Issue 3 pages 485ndash531 June 2006 15 Letter to Elizabeth M Murphy Secretary US Securities and Exchange Commission Vale Columbia Center on Sustainable International Investment December 16 2011 httpwwwsecgovcommentss7-42-10s74210-115pdf16 Allianz Interview with David Diamond October 11 2013 httpswwwallianzcomenpressnewscompanypoint_of_viewnews_2013-10-11html17 Moodys Investors Service Inc ldquoIssuer Comment Senegals EITI Candidacy Status Approved a Credit Positiverdquo October 25 2013 httpwwwalacrastorecommoodys-credit-researchSenegal-s-EITI-Candidacy-Status-Approved-a-Credit-Positive-PBC_159679sthash1OG03a9sdpuf

7

governments creditworthiness Adopting EITI standards will provide a more predictable operating environment in the natural resources sector18

Similarly in May 2010 the credit rating agency Fitch raised Azerbaijanrsquos Issuer Default Ratings (IDRs) to BBB- from BB+ and its rational featured the benefits of EITI on investor confidence prominently

These are only two of the many examples that suggest that the participation in EITI and the accompanying improvements to transparency and good governance can have positive effects on the investment environment of countries and their sovereign debt

However this benefit is limited to countries in which EITI implementation is politically feasible Unfortunately the limits of EITIrsquos reach deprive investors of important data and indicators of investment stability and creditworthiness in many countries where improvements in governance are likely to be material considerations

Of the 15 countries assigned a ldquofailingrdquo score in the Natural Resource Institutersquos 2013 Natural Resource Governance Index only three are EITI compliant (Cameroon the Democratic Republic of the Congo and Mozambique) None of the others assigned ldquofailingrdquo scores are currently even candidates for EITI implementation19

Investors in sovereign debt may simply choose to avoid exposure to countries with high political risk indicators or poor credit ratings However investors in the securities of natural resource companies with portfolios that have exposure to the same countries may not have this option Prompt implementation of Section 1504 would fill these critical gaps in investorrsquos understanding in countries where payment transparency is most critical

6 Better understand the risks of fiscal regulatory change

The knowledge of actual payments can help assess the Government Take or Effective Tax Rate (ETR) which is the total government payments divided by the pre-tax profit Assuming production prices cash costs capital expenditure and financial expenses are known to the investor project level payment disclosure provides information necessary to compute the numerator

Knowing the Government Take will enable the ranking of projects extracting the same commodity and situated in a group of peer countries (those with similar geology infrastructure and political risks) For each of those projects both the Government Take and the project Internal Rate of Return (IRR) may be be computed as shown in the figure to the left If the

IRRandETRforaModelCopperMinein SelectedCountries(SourceJamesOtto 2006)

18 Ibid 19 Natural Resource Governance Institute 2013 Resource Governance Index httpwwwresourcegovernanceorgrgireportfig1

8

Government Take is far below average while the IRR is far above average there may be pressure to renegotiate the contract or to revise the fiscal regime

7 Help solve the principal ndash agent problem

When a capital provider invests in an extractive company he or she is the principal and the company is the agent As an agent the extractive company must maximize returns for a given level of risk in accordance with the companyrsquos strategy The investor must carry out due diligence to ensure that the company behaves accordingly and in line with what is reported Transparency of payments at the project level provides additional information useful for investors to monitor companiesrsquo behavior and profitability

In sum we commend the SEC on its diligence in reflecting the needs of investors in its implementation rules for Section 1504 It is our hope that these examples highlight the usefulness of transparency to both active and passive investors and why it is of utmost importance to maintain company-specific project level payment disclosure when issuing new rules to create improved efficiency in the capital markets Furthermore as outlined in the appendix project level reporting is becoming the new standard Not aligning the transparency rules to this standard would make it more complicated for investors to assess and compare the oil gas and mining companies in their portfolios

We would welcome the opportunity to discuss these issues further at your convenience

Sincerely

Jeffrey D Sachs Chair Advisory Board Columbia Center on Sustainable Investment Director Earth Institute Columbia University

Perrine Toledano Head Extractive Industries Columbia Center on Sustainable Investment

Nicolas Maennling Senior Economics and Policy Researcher Columbia Center on Sustainable Investment

Paul Bugala Independent Investment Analyst

9

APPENDIX

Mandatory and voluntary disclosure of project level tax payment data

Since July 2010 the European Union Norway and Canada have adopted laws similar to Section 1504 of the Dodd-Frank Act requiring project level payment reporting and Australia introduced such a bill into the Senate in October 2014 The Extractive Industries Transparency Initiativersquos (EITI) new standard introduced in July 2013 also includes revisions that require consistency with the US and EU mandatory reporting laws in the area of project level disclosure Several forward looking oil gas and mining companies have already embraced voluntary project level payment reporting including BHP Billiton Kosmos Energy and Tullow Oil (of which Kosmos Energy BHP Billiton and Rio Tinto are listed on a US stock exchange)

These developments suggest that the SEC would be making a mistake if it did not use the global standard for project level payment disclosure in crafting the new Section 1504 implementation rule Different standards will make reporting more complex and costly for cross-listed companies These companies include at least 22 of the global top 100 oil and gas companies and 25 of the global top 100 mining companies20 Similarly different reporting standards would make it more complicated for investors to assess and compare the oil gas and mining companies in their portfolio

European Union

The EU adopted the Accounting and Transparency Directives in June 2013 The Accounting Directive requires large oil gas mining and logging companies that are registered in Europe to annually disclose any payments above euro100000 to governments on a project-by-project basis The Transparency Directive requires the same of all extractives companies listed on an EU-regulated exchange no matter the companyrsquos size A project is defined as ldquothe operational activities which are (a) governed by a single contract license lease concession or similar legal agreement and (b) form the basis for payment liabilities with a governmentrdquo The Directives recognize as ldquoequivalent reporting requirementsrdquo those in non-EU countries that have been assessed by the European Commission as being equivalent in accordance with article 47

Member states were given a deadline to enact the Accounting Directive into national law by the 20th of July 2015 and the Transparency Directive by November 2015 This foresees the first reports being published in 2016 for the previous calendar or financial year As part of its commitment to the G8 Presidency to ldquodemonstratehellipcommitment to the global company transparency agendardquo21 the UK was the first country in the EU to pass government regulations following the Directive on November 28 2014 The first reports under the UK rules will be available for the 2015 financial year

20 Publish What You Pay (2015) Transparency on the Move Payment Disclosure by the Worldrsquos Largest Oil Gas amp Mining Companies httpwwwpublishwhatyoupayorgpwyp-resourcestransparency-on-the-move-payment-disclosure-by-the-worlds-largest-oil-gas-mining-companies 21 Publish What You Pay (2015) Fact Sheet UK implementing regulations and rules for reports on payments to governments (EU Accounting and Transparency Directives) httppublishwhatyoupayorgsitespublishwhatyoupayorgfilesPWYPUK_fact_sheet_UK_regulationsamprulespdf

10

APPENDIX

Mandatory and voluntary disclosure of project level tax payment data

Since July 2010 the European Union Norway and Canada have adopted laws similar to Section 1504 of the Dodd-Frank Act requiring project level payment reporting and Australia introduced such a bill into the Senate in October 2014 The Extractive Industries Transparency Initiativersquos (EITI) new standard introduced in July 2013 also includes revisions that require consistency with the US and EU mandatory reporting laws in the area of project level disclosure Several forward looking oil gas and mining companies have already embraced voluntary project level payment reporting including BHP Billiton Kosmos Energy and Tullow Oil (of which Kosmos Energy BHP Billiton and Rio Tinto are listed on a US stock exchange)

These developments suggest that the SEC would be making a mistake if it did not use the global standard for project level payment disclosure in crafting the new Section 1504 implementation rule Different standards will make reporting more complex and costly for cross-listed companies These companies include at least 22 of the global top 100 oil and gas companies and 25 of the global top 100 mining companies20 Similarly different reporting standards would make it more complicated for investors to assess and compare the oil gas and mining companies in their portfolio

European Union

The EU adopted the Accounting and Transparency Directives in June 2013 The Accounting Directive requires large oil gas mining and logging companies that are registered in Europe to annually disclose any payments above euro100000 to governments on a project-by-project basis The Transparency Directive requires the same of all extractives companies listed on an EU-regulated exchange no matter the companyrsquos size A project is defined as ldquothe operational activities which are (a) governed by a single contract license lease concession or similar legal agreement and (b) form the basis for payment liabilities with a governmentrdquo The Directives recognize as ldquoequivalent reporting requirementsrdquo those in non-EU countries that have been assessed by the European Commission as being equivalent in accordance with article 47

Member states were given a deadline to enact the Accounting Directive into national law by the 20th of July 2015 and the Transparency Directive by November 2015 This foresees the first reports being published in 2016 for the previous calendar or financial year As part of its commitment to the G8 Presidency to ldquodemonstratehellipcommitment to the global company transparency agendardquo21 the UK was the first country in the EU to pass government regulations following the Directive on November 28 2014 The first reports under the UK rules will be available for the 2015 financial year

20 Publish What You Pay (2015) Transparency on the Move Payment Disclosure by the Worldrsquos Largest Oil Gas amp Mining Companies httpwwwpublishwhatyoupayorgpwyp-resourcestransparency-on-the-move-payment-disclosure-by-the-worlds-largest-oil-gas-mining-companies 21 Publish What You Pay (2015) Fact Sheet UK implementing regulations and rules for reports on payments to governments (EU Accounting and Transparency Directives) httppublishwhatyoupayorgsitespublishwhatyoupayorgfilesPWYPUK_fact_sheet_UK_regulationsamprulespdf

10

Norway

Norwayrsquos parliament approved legislation requiring project level reporting of oil gas mining and forestry companies in December 2013 No country-based exemptions are allowed and the requirements are effective for the fiscal year of 2014 with the first reports for 2015 already available

Canada

In Canada the Extractive Sector Transparency Measures Act received royal assent on December 16 2014 and was passed into law on the 1st of June 2015 It follows the EU Directives closely One of the major differences to the EU Directives is that the reports require attestation by a director or office or an independent auditor or accountant to confirm that the information in the report is true accurate and complete Fines for non-compliance can reach up to $250000CAD

Australia

On October 28 2014 the Corporations Amendment Bill was introduced into the Senate which foresees amending the 2001 Corporate Act requiring Australian extractive and logging companies to disclose any payments made to foreign governments over A$100000 on both a country-by-country and project-by-project basis It also foresees for the Australian Securities and Investments Commission to publish the Publish What You Pay reports on their website within 28 days upon receipt The bill still needs approval by both houses of the Australian Federal Parliament to become law

Extractive Industries Transparency Initiative (EITI)

The EITI was launched in 2003 as a voluntary multi-stakeholder initiative for extractive industries bringing together governments industries and civil society22 In order to become a compliant country among other things companies have to report how much they paid to governments and governments have to report how much they received This allows a public reconciliation of accounts to assess whether any money went missing

Revisions made to the EITI Standard in July 2013 aim specifically at ensuring convergence with the disclosure standard pioneered by Section 1504 Among these enhancements is the EITI Standardrsquos requirement of project level disclosure ldquoprovided that it is consistent with the United States Securities and Exchange Commission rules and the forthcoming (sic now implemented) European Union requirementsrdquo23 The United Kingdomrsquos implementation of the EITI standard is proceeding with implementation of project level reporting based on the EU Transparency and Accounting Directives (reporting templates for oil and gas24mining operations25) In the past

22 EITI History httpseitiorgeitihistory 23 EITI Standard Section 52e httpseitiorgfilesEnglish_EITI20STANDARD_11July_0pdf 24 UK EITI ldquoFinal Reporting Template Oil and Gasrdquo httpswwwgovukgovernmentuploadssystemuploadsattachment_datafile440677Final_Reporting_Template_Oil _and_Gasxls

11

Burkina Faso Indonesia Mali Timor-Leste and Zambia have either explicitly or effectively already required project level reporting

In April 2014 a group of investors involved in EITI and representing more than $6 trillion in assets under management wrote to the SEC pushing it to issue rules for the implementation of Section 1504 promptly and noting that ldquomandatory project- level reporting provision contained in Section 1504 as entirely consistent with and complementary to the goals of the EITI26rdquo

Reporting by Companies

Statoil

In 2015 Statoil published all payments equal or exceeding NOK80000027 on a project level basis (bonuses fees and royalties) or entity basis (income tax) It also published payments to the Angolan government which is one of the countries that the American Petroleum Institute (API) argues has laws in place that make publicizing revenue and government payment data illegal

Statoil has stated it ldquowelcome[s] initiatives to strengthen revenue transparency legislation including project level disclosure of payments as laid out in the EU Transparency Directive and in the Norwegian transparency rule a global standard for revenue disclosure would be even more welcomerdquo28 In 2013 the company also permitted the disclosure of correspondence that states ldquoStatoil has not supported the lawsuit initiated by API in fact Statoil has explicitly withheldrdquo29

Rio Tinto

In 2015 Rio Tinto published its fifth voluntary tax payment report which includes tax payments by business units Many of the business units are individual projects which also allows for the assessment of corporate income tax payments on a project level basis

In the report Rio Tinto states ldquoWhile we support transparency in reporting of tax payments we are concerned about the proliferation of such new initiatives Potentially we will face multiple and inconsistent reporting requirements and will incur significant additional costshellipWe therefore believe governments should work together to adopt a consistent global approach which establishes disclosure requirements and thresholds that are proportionaterdquo 30

Tullow Oil

In 2015 Tullow Oil released its second annual report which complied with the EU Directives and UK regulations on mandatory disclosure on a project-by-project basis The company also 25 UK EITI ldquoFinal Reporting Template Mining and Quarryingrdquo httpswwwgovukgovernmentuploadssystemuploadsattachment_datafile440675Final_Reporting_Template_Mi ning_and_Quarryingxlsx26 Letter to Mary Jo White Chairman US Securities and Exchange Commission Group of institutional investors April 28 2014 httpwwwsecgovcommentsdf-title-xvresource-extraction-issuersresourceextractionissuers-35pdf27 Slightly less than US$100000 as of September 28 2015 28 Statoil (2015) 2014 Payment to governments 29Letter from Baiba Rubesa Vice President Corporate Social Responsibility Statoil February 5 2013 httpwwwglobalwitnessorgsitesdefaultfileslibraryStatoil20Letter20to20Global20Witnesspdf 30 Rio Tinto (2015) Taxes paid in 2014 A report on the economic contribution made by Rio Tinto to public finances

12

provided additional voluntary disclosures on VAT stamp duty withholding tax pay-as-you-go payments and other taxes31 Tullow Oilrsquos Group Vice President for Safety Sustainability and External Affairs in October 2014 stated ldquo[o]n the question of whether there have been any negative repercussions the short answer is no It hasnrsquot cost us a lot of money and candidly both in the countries in which we operate and others we havenrsquot had negative repercussionsrdquo32

Kosmos Energy

In 2015 New York Stock Exchange-listed Kosmos Energy voluntarily disclosed its contracts agreements and 2014 payments to governments at the project level and on a disaggregated basis ahead of any legally-mandated deadline to do so Kosmosrsquo belief is ldquothat this type of disclosure is beneficial to investors civil society and local communities and reflects evolving international expectationsrdquo33

31 Tullow Oil PLC (2015) 2014 Annual Report and Accounts Page 169 httpwwwtullowoilcomMediadocsdefault-source3_investors2014-annual-reporttullow-oil-2014-annual-report-and-accountspdfsfvrsn=432 Comments by Sandy Stash Group Vice President for Safety Sustainability and External Affairs Tullow Oil October 9 2014 httpwwwresourcegovernanceorgnewsoctober-9-washington-power-data-transform- natural-resource-governance-and-drive-economic-develo at 1001433 Kosmos Energy ldquoTransparencyrdquo httpwwwkosmosenergycomresponsibilitytransparencyphp

13